Nickel market may be missing the bigger picture

With 2014 quickly approaching, all eyes in the market appear to be turned east to Indonesia.

As of the beginning of December, the Indonesian government has signalled that it would proceed with putting into effect a ban on unprocessed mineral ores.

Roskill’s nickel analyst, Thomas Hohne, answers some of the major questions related to the ban and its effect on the nickel market, and shares some of Roskill’s views of what other factors will be driving the nickel market in the years to come.

What should we expect to happen come January 2014?

Shipments are set to be barred from January 12th onwards as proposals for a phased introduction of the ban have been discussed, but not adopted, as of yet.  With Indonesia’s earnings from ore exports in the range of US$10 billion in 2013, much of which would evaporate overnight, pressure for some intermediate solution will remain.  Because of this, however, any temporary solution is likely to be reached after the imposition of the ban, rather than before.  Moreover, Indonesian officials have already indicated that even as the legislation will go ahead, implementation of the ban may allow for some amendments in practice.

What will be the effect of the ban on the nickel market?

Indonesian nickel ore accounted for approximately 59% of China’s nickel ore imports in 2013, but demand for nickel ore has been artificially elevated in anticipation of the ban.  Although Roskill estimates Chinese production of charge and refined nickel at 659kt in 2013, real demand is considerably lower.  Stockpiles of unprocessed nickel ore in Chinese ports are estimated to be in the range of 20Mt, while consumer stocks of nickel pig iron (NPI) are estimated at over 280kt.  Roskill also expects that in spite of a temporary disruption early in the year, ore exports from Indonesia will continue, with the Philippines increasing exports.

Production of NPI in China is expected to flatten out, bringing supply in line with real demand.  So far, the effect on prices of the announced ban has been relatively subdued. Prices made a small recovery in the first week of December, but this followed a drop in November that pushed the price of nickel back to well under US$14,000/t.  In combination with the stockpiles of nickel ore and NPI, there is sufficient flexibility in the market such that any increase in prices as a result of the ban will likely be gradual, although speculative activity could result in short-term spikes.

What will be the likely medium and long-term implications of the ban?

Roskill’s nickel report provides an overview of a selection of the 89 smelter proposals that Indonesian officials report to have received, of which only a small portion have commenced construction.  In China’s case, when NPI first started to be produced, production increased by around 175kt over a period of five years.  This time around, projects in Indonesia benefit from strong financial backing and access to established technologies, but face a diminished price outlook and infrastructural challenges, particularly as regards to access to electricity.  Rotary kiln electric furnace (RKEF) projects may be particularly delayed and Roskill forecasts production of NPI in Indonesia in terms of nickel content to increase to around 37kt in 2015, to just under 150kt by 2018.

Production of NPI in Indonesia (and, possibly, the Philippines) also circumvents the 20% export tariff that China imposes on exports of NPI, and opens up the possibility of exports of NPI to the rest of the world – although with most of the smelter projects Chinese-owned, this would probably only account for a small share of the total production of NPI.

How likely is the Philippines to follow suit?

There is no doubt that officials in the Philippines will be carefully monitoring Indonesia’s experiment. While a bill promoting the development of mineral processing was proposed during the last Congress, it failed to reach the country’s senate, and has not gained any momentum since.  The Philippines, however, is likely to reap some of the windfalls of increased demand for its nickel ore as a result of reduced availability of Indonesian ore and there is a possibility that the export tax on nickel ore will be raised from 2% to 7% in 2014.

What else lies in store, beyond the Indonesian ban?

Nickel reserves in Indonesia, according to estimates by the USGS, amount to approximately ten years’ worth of production, at 2013 levels of output.  In the Philippines, however, reserves of 1.1Mt represent less than three years’ worth, so that the discovery, exploration, upgrading and development of further lateritic nickel ore deposits – both in the Philippines and beyond – remains an important priority.

In China, the ongoing trend towards the production of higher grade stainless steel and higher grade NPI is likely to continue.  In 2013, high-grade NPI of 9-15% Ni is estimated to have accounted for 81% of total NPI production, up from 44% in 2010.  The substitution of blast furnaces by RKEFs has also had an impact on production costs, reducing costs by around 25%.  Further innovations lie ahead, such as the introduction of Rotary Kiln Direct Reduction (RKDR) plants, which are able to accept a variety of nickel ores as feedstock and are able to produce NPI with nickel content of up to 20%.

What effect on prices may be expected, if any?

Since 2011, the price of nickel has fallen as a result of a surplus overhanging the market. This is set to continue over the next few years as recently completed large-scale operations are ramping up to full production.  Whereas no shortage of nickel is forecast in the near term, a forecast demand growth rate of 3.9%py combined with the slow current pace of advancement of nickel projects will result in an eventual rebalancing of the market, towards the end of Roskill’s outlook period in 2018.

While Roskill forecasts a gradual increase in nickel prices through 2015 as a result of the Indonesian ban, a stronger increase is expected from the end of 2017 onwards, as prices must eventually increase to permit investment in future capacity to supply the market into the next decade.  Forecasts are affected not only by trends in demand and production costs, but also by investor’s perceptions of risk and capital availability, which vary between locations, as outlined in Roskill’s report. In its baseline scenario, Roskill forecasts prices to recover to US$18,000/t by the end of 2018 in real terms (or US$19,942/t in nominal terms), with some further increases expected thereafter.

Roskill Information Services Ltd. of London, UK is a leading provider of multi-client and bespoke market research services to the minerals and metals industry. Web: www.roskill.com/nickel

Image of Aline H. Rhonie, American painter, 1909-1963, at work on aviation mural at Roosevelt Field, Garden City, New York